The Missing-in-Action Economics of

John Kenneth Galbraith

J. Bradford DeLong
Professor of Economics, U.C. Berkeley
Research Associate, NBER

brad.delong@gmail.com

December 2006

John Kenneth Galbraith was the most politically-influential American

economist in the twentieth century. He gave more advice to more
presidents and senators than should have been possible with three lives.
The pieces of advice that we remember best are those that went counter to
that time's "conventional wisdom," a phrase that Galbraith coined: that
strategic bombing did not win World War II; that Vietnam was a
strategically-unimportant quagmire where we were likely to do more harm
than good; that claims for the macroeconomic "fine tuning" of the
economy were likely to blow up in your face; that the capacity of
businessmen to delude themselves was nearly infinite.

Galbraith's politics have been in retreat for a generation now. John

Kenneth Galbraith saw America as a would-be social democracy that has
lost its way. If only Americans were to cease to credit the delusions and
self-serving declarations of the right, he thought, then it would become
crystal clear that a bigger government doing more things would make
America a much better place. Galbraith's political views have been losing
relative influence for a generation now, for both good and bad intellectual
reasons and for largely bad sociological reasons as well. Nobody today
likes to hear about the importance of Big Government, Big Labor (which
barely exists), and Big Bureaucracy. On the bad-intellectual-reason side,

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big business prefers to redefine itself as entrepreneurial and self-reliant
CEOs bending reality to their will, rather than as sophisticated organs of
relatively large-scale planning embedded in an imperfectly-competitive
economy. And nobody today wants to claim that there is a Big Enough
Labor to exercise any effective power at a scale sufficiently large to be
countervailing.

On the good-intellectual-reason side, Galbraith lacked a comprehensive

and easily-graspable theory of government failure. Declarations that
markets are producing substantial failures call forth the question,
"compared to what?" And until American liberals have a good,
comprehensive, and easily-grasped theory of governmental failure and
success, competence and incompetence, I believe that they will continue to
find themselves in relative retreat.

Richard Parker has a powerful sociological explanation for the relative

eclipse of Galbraith's politics: a loss of nerve on the part of America's
Democratic Party establishment. Too many Democratic intellectuals and
politicians drink cocktails at Martha's Vineyard and not enough spend
time on the shop floor learning what issues are important to those
sweeping-up or on the assembly line or manning the convenience store
cash register from midnight to six--and so the mass base of the Democratic
Party withers. Without a mass base, Democratic politicians listen too
much to their relatively rich contributors, and turn into Eisenhower
Republicans--people like me.

But I am here to talk not about Galbraith's political activities, his politics,
or his policy advice: I am here to talk about John Kenneth Galbraith's
economics--an economics that, I have said before, ought to have made him
one of the most if not the most influential American economist of the
twentieth century. And Galbraith's economic views have undergone an
even more distressing eclipse. Among economists--my own tribe, the tribe
of economic historians, an exception--the seventy-year-olds have read
Galbraith and think he is very important; the fifty-year-olds have read
Galbraith and know that the seventy-year-olds think he is important, but
are not sure why; and the thirty-year-olds have not read Galbraith.

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One part of the story is one of blindness on the part of an academic
establishment descended from Paul Samuelson's Foundations of Economic
Analysis. Paul Krugman made this point in a different context in his paper
on "The Fall and Rise of Development Economics": if one values formal
modelling, but is not very good at it, then the range of ideas that you can
seriously consider will be small and limited to those that your relatively-
feeble modelling skills can grasp. Economists over the past generations
have not yet been that good at formal modelling. And so insights that find
institutional and narrative expression are stripped out of the discourse
when it moves to the model-building stage.

Harry Johnson, in his superb but not-entirely-fair Ely Lecture criticizing

Milton Friedman's Monetarists, said that in order to carry out an
intellectual revolution in economics you need to propound a doctrine that
has three properties:

1. It can be summarized in a sentence.

2. It must provide the young with an excuse for not reading their elders.
3. It must provide clear signposts telling the young what they can do to
contribute to the ongoing revolution.

John Maynard Keynes and Milton Friedman both propounded such

doctrines. They said, respectively, that "aggregate demand determined
supply" and that "inflation was always and everywhere a monetary
phenomenon"; they dismissed their predecessors as obsolete; they set
hundreds of young to the task of estimating consumption, investment, and
money demand functions.

John Kenneth Galbraith propounded no such easily-summarizable

doctrine. The closest we can get is: "the world is complicated, and the
conventional wisdom that is this age's self-image and the right-wing
ideologues are both terribly wrong." For Galbraith, there is no one market
failure to serve as serpent in the Eden of perfect competition. He starts
from the ground up--what are the major economic institutions, and how do
they interact? You could not tell somebody how to follow in Galbraith's

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footsteps. The only advice you could give would be useless: Be supremely
witty. Write very well. Read very widely Know a great deal of
institutional detail. Galbraith provided critiques of old theories which
required that you have read and understood them--not a new theory that
excused you dismissing everything earlier as irrelevant. And there were no
signposts pointing down the path to become a Galbraithian.

The result? In academic economics today, we are nearly all Paul

Samuelson's children. Many of us are John Maynard Keynes's children.
Bob Solow and Milton Friedman and Bob Lucas and Jim Tobin have
many descendants. But Galbraithians are few on the ground. Would
economics as a discipline be stronger if the fifty-year-olds and the thirty-
year-olds had the appreciation of Galbraith that their seventy-year-old
elders do? In my view, almost surely. Will economic fashion turn and
economists appreciate Galbraith once more? For that to happen, somebody
would have to turn their hand to mathing-up chapters of The Affluent
Society and The New Industrial State and publishing them in journals.
That's too high-stakes a bet for assistant professors to make, and those
with tenure already have their own research projects.

This is a shame. Professors teaching the United States since World War II
can still do no better than to assign his books The Affluent Society and
The New Industrial State to teach students what the American economy
that so dominated the world in the middle of the twentieth century looked
like--and what a post-New Deal liberal thought should be done to make it
work better. Anyone wanting to learn about the start of the Great
Depression or about the functioning of financial markets in a time of
irrational exuberance should still start with Galbraith's The Great Crash:
there will never be another history of the stock market bubble of 1929 that
is as worth reading. During World War II he played a key administrative
role in squaring the circle that was pushing production far above
economists' measures of potential output while not allowing runaway
inflation to undermine the legitimacy of economic mobilization for World
War II at the Office of Price Administration. These are the insights that
drop away when we move to formal models.

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Galbraith's work as an economist was a scattered but comprehensive
attempt to think through the consequences of the replacement of an
America of small farms and workshops by one of large factories and
superstores. Just how influential could advertising be in shaping demand?
In a world of passive shareholders, autonomous managers and engineers,
and firm decisions that emerged out of internal bureaucratic contests, just
what were the objectives that big firms acted as if they were pursuing?
How did competition work when its principle dimension was not price but
instead quality and perhaps advertising? How did the limits of thoughts
permitted in polite discourse--the "conventional wisdom"--allow the
system to hold itself together while constraining its flexibility? And if
economists' standard vision of competition was in fact as weak as
Galbraith believed it to be, why was the mid-twentieth-century American
economy so efficient compared to every single other nation?

The conventional wisdom among American economists and in American

economics today tends to endorse claims that the most efficient economy
is one in which the gales of perfect competition scour the land clean. In
Galbraith's view, these arguments were nonsense. Even when undertaken
not by one but many firms, modern industrial and post-industrial
production is a very large-scale process; large-scale requires planning; and
planning requires a certain stability, which means that the gales of large
swings in market prices and in quantities demanded have to be contained
or at least managed. As Marty Weitzman formalized a generation ago,
relatively centralized planning have the advantage when the costs of
failing to coordinate quantities in the right proportions are high, and
decentralized markets have the advantage when the costs of failing to
respond to shocks to users' value are high.

So, then, what would a Galbraith-school or a Galbrath-influenced-school

or a Galbraithian economics for the twenty-first century look like? What
would be the research program that could produce useful insights about
the economy in a distinctively Galbraithian vein?

A first thread would pick up Galbraith's argument that we are an affluent

society, an argument that he made in The Affluent Society. Adam Smith's

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Britain was poor. Most people most of the time had relatively simple
demands: enough food not to be hungry, enough clothing not to be cold,
enough shelter not to be wet. Today we--at least those of us here--have
more complicated and subtle market demands: enough comforts not to be
uncomfortable, enough entertainment not to be bored, and enough status
markers not to feel small. This change is one of the most glorious things
about our economy and technology. As George Stigler liked to say, it is
the very essence of economic progress to turn conveniences into
necessities, luxuries into conveniences, and to invent new and previously
unheard-of luxuries.

But while the nature of the things demanded in relatively poor societies is
relatively obvious, the nature of things demanded in affluent societies is
not. The psychological-sociological-economic process by which we decide
what our wants are is something that is desperately important in
understanding our economy. It is something that businesses that spend a
fortune on non-informative advertising are desperately eager to influence
and guide. It is something we do not understand very well.

Galbraith did not have a theory of the shaping of tastes and the formation
of demand. He has insights--the insight that demand for public national
parks was likely to be too low and demand for SUVs too high because a
great deal of money was spent drawing symbolic links between driving an
SUV and being happy, while there was no countervailing costly drawing-
of-symbolic-links between having national parks and being happy.
Galbraith's observations called forth a vociferous critique. I have always
liked Milton Friedman's version. He viewed Galbraith as the modern-day
equivalent of an early nineteenth century anti-market radical Tory: "Many
reformers -- Galbraith is not alone in this -- have as their basic objection to
a free market that it frustrates them in achieving their reforms, because it
enables people to have what they want, not what the reformers want.
Hence every reformer has a strong tendency to be averse to a free market."

A second thread would pick up on Galbraith's sociology of organizations:

the ideas that form a cloud around Galbraith's word "technostructure." If
Ronald Coase were here, he would agree that the existence of so many

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very large firms spanning so many industries indicates that there are truly
powerful advantages over a large scale to coordination through authority
and command and bureaucracy rather than through market exchange. But
he would be at sea with respect to what businesses that have substantial
freedom not to obey market forces actually do.

What do they do? Galbraith pointed out incentives for organizational

growth, incentives to take steps to maintain market stability, incentives
toward technological rationality. We today would add an incentive to pay
the CEO an absolute fortune as the winner of some complicated
tournament--and we can observe that the current patterns in top-
management compensation are a powerful argument that the pressures to
maximize shareholder value are not all that great. But we have advanced
little beyond Galbraith's insights of the 1960s in our understanding of how
market forces constrain and fail to constrain large business organizations,
and why they do what they do with what relative freedom of action that
they have.

The third thread would pick up on the relationship between technological

development and large business enterprise. I think it was Paul Samuelson
who I first heard say, "It takes a heap of Harberger triangles to make up
for one Bell Labs." One of the things that AT&T bought with its effective
monopoly over telephones before 1985 was a quiet, orderly, organized
life. Another thing that it bought was a lot of fundamental and applied
research. What does the balance sheet say about this?

The questions asked by Galbraith's economics are now, I think, low-

hanging fruit. I look forward to seeing lots of interesting and productive
work on them over the next two decades.